Andy,

If you had bothered to read the judge's opinion before lowering the guns on Donegal, you might have noticed that they spent three and a half years making debt conversion proposals to the debtor government in order to invest in Zambia and only brought litigation as a last result... Doesn't sound like your typical vulture, does it...

Debt conversion is authorized by the Paris Club of creditor countries from the OECD and was pioneered in the equally poor latin countries of South America in the mid 1980's. Other typical vultures like UNICEF and the World Wildlife Fund did debt conversions all over Africa in the early 1990's...

Do you guys actually read before you quote? Just cause it's the BBC, doesn't mean it's true...

Disgruntled reader...

No-one likes carrion-eaters. In economics as in eco-systems, though, they frequently play a useful function. In this case, if Donegal wins its case, it seems at least possible that they LOWER the cost of Third World borrowings for some time to come, because lenders will calculate they have a better chance of recovering their investment in the event that the Third Wolrd country default. We can hypothesise that loans to countries like Zambia will come cheaper; repayments of a given amount will be smaller; these countries will be richer.

I know that not all lenders make rational calculations, but my experience is that lenders contemplating eight-digit and nine-digit loan amounts take a great interest in their chances of recovering their dough after a default.

It may be that Donegal's actions are indeed a net negative for the poor, but the logic above at least deserves some analysis. One of the remarkable and counter-intuitive effects of markets is that a party need not ooze compassion in order to deliver a positive outcome.

marktgarten said: The vulture fund's actions sound a lot like the tort of interference with business relations. That tort's elements generally are: (1) existence of a valid contractual relationship between the plaintiff (i.e., Zambia) and a third party (Romania) or valid business expectancy of plaintiff; (2) defendant's (Donagel International) knowledge of the relationship or expectancy; (3) intentional interference by defendant inducing breach or termination of the relationship or expectancy and (4) damages.

No offense, but you sound like a typical first-year law student!

Perhaps you missed this bit:

[J]ust before the deal was signed, an outfit called Donegal International swooped in, bought the debt from Romania for $4 million, and then turned around and sued Zambia for the original loan plus interest and other fees, which it calculated to be some $42 million.

One of the parties to a contract (Romania) voluntarily (and for valuable consideration, I might add) assigns its rights to a third-party (Donegal). Assuming that there was no provision in the loan agreement against such assignment, howinthehell do you come up with a tort? Donegal did not come between the parties, it reached an agreement with one of them to step into its shoes.

Selling bad debts to collectors is nearly as old as commerce itself (what do you think that the tax collectors in the Bible were doing? ever heard of factoring?). As such, I fail to see the justification for treating this as a new type of moral outrage.

In this context, a country is no different than any other borrower. Having received the benefit of its bargain, it must now pay what is owed; I am assuming that the loan agreement provides for financial penalties for late payment and default, justifying the $42MM demand. Obviously, Donegal does not expect to receive the full amount of its demand, merely some amount in excess of the $3MM it paid for the loan paper sufficient to constitute a reasonable rate of return.

You've the wherewithal to uncover that.

Publish it from hell to back.

Then the masses would have names, atleast.

We'd know where these thugs live...so to speak.

Or not..as in, they know where YOU live.

Maybe it's come to that.

So what if a nation defaults on a private debt? What's the worst that can happen? Someone flies in and makes their credit rating even worse which jacks the interest rate of yet more debt they have neither the ability nor the inclination to repay?

we either encourage countries to get their public administration and finances sorted, and start paying for social programs themselves, or we maintain the status quo of dependency on external donations for social programs. I'm not sure which is better, but i'd like to see the the aid apparatus go the way of the dinosaur, and countries stand on their own feet.

Still, I am guessing that the loan from Romania was commercial (likely through an export credit agency?), not ODA-based. And so I'll hope that the government won't truly rob its HIPC and poverty reduction funds to pay it off (presumably it could come from a different account?). And I'll also hope that donors will put pressure on the Zambian gov't to keep the social programming budgets as they are. But that's a lot of hoping.

And I have a question, for anyone who knows: is it possible for firms like Donegal to interfere in HIPC (government: government) debt?

My wife attended a seminar yesterday where the subject was buying second mortgages. As the lecturer explained, the idea is this:

1) Find a situation where the 2nd mortgagor expects nothing from the mortgagee and is planning to write the entire amount off. In our example, assume the 2nd is for $30K.

2) Buy the 2nd for some much smaller amount, like $5K.

3) Go to the mortgagee and convince them to beg borrow or steal $10K, from family members if necessary. Promise them if they only pay you that much, you will not take them to court. The magic is that it is not worth it to take them to court, but they don't know that. Since they are not, and cannot afford, lawyers, you can use their poverty-induced ignorance against them to impoverish them even more. It's like magic!

My wife asked if this was even legal and she was assured that it was, due to the way 2nd mortgage notes are usually structured. When she came home she was kind of depressed. We talked about it and decided that somehow it was just wrong, even though "legal" since the 2nd mortgage company had already made their profit/loss on the deal and built those numbers into the fees we all pay for credit. In addition, a knowledgeable mortgagee would have been able to tell the buyer to go fly a kite. I think there is a balance between allowing people to fail on their own and helping them to fail by keeping them ignorant of standard practices.